The pension industry grew up at a time when for many people a job was for life. Many young people left school, found a junior role with a large employer, and worked their way up for the next fifty years.
It meant that when the time came to retire, in most cases they had a single pension pot, and very little choice in how they used it to provide a pension. But life, work and pensions have all moved on.
The job for life is a thing of the past and the average British worker will have six employers in the course of a working lifetime. This means that by the time we come to retire, most of us have several pension pots from various employers, as well as a private pension.
The question is, what is the best way to make the most of those pension pots? Should we consolidate them all into one, or keep them separate?
Why you should consolidate them all
It can be tempting to have all of these pension pots in one place, as they will be easier to keep track of. You may be able to reduce management fees if you only have one lump sum that needs care and investment on your behalf.
It is easy enough to do. Most of us have grown used to the idea of moving around money between accounts. A few clicks of a mouse can put all your pensions in a single fund, where they can all work harder together, attract fewer management costs and be easier to call on if you need them.
But perhaps there are reasons not to put all your eggs in one basket.
Why you shouldn’t
While it may seem the tidiest thing to do and can have some advantages, there are also a number of disadvantages to merging pension pots.
Older pension policies may have attractive features which are lost if transferred, whilst small pots can benefit from tax privileges which might not apply to larger sums.
Some older employer pensions come with valuable guarantees, including safeguards such as guaranteed annuity rates (GARs). Some pension schemes will guarantee a certain level of income with your pension or that the value of the units within it cannot fall below a certain level.
What’s more, changes on pensions vary considerably, and it’s not always true that a consolidated pension will have lower charges. Some employers subsidise the charges on their pension schemes, and a pension with a 0% charge can be much more rewarding than one with 5% trimmed off.
There could even be charges simply for transferring your pension with some providers.
It all means that transferring your pensions has the potential to leave you rather worse off.
So, what should you do?
If you are considering consolidating your pension pots, you should seek professional help. There is actually a requirement for those with the safeguarded benefit of a guaranteed final salary to take financial advice, if they want to transfer and their pension pot is worth more than £30,000.
Fortunately, at Continuum whatever the size of your pot we can call on the expertise you need. We can help check the benefits offered by each one you have accumulated over the years – we have found that not all may be included in the paperwork that is sent to check before your pension is transferred.
You also need to consider just what you will do with your pot if you do consolidate it. Unless you are an expert investor, choosing how your newly consolidated pension should be invested in can be daunting.
At Continuum we know that getting the right mix of investments should involve not just a knowledge of the investment market, but an understanding of your own attitude to financial risk and your individual circumstances. Everyone has different tolerance of risk and different plans for retirement, and this can make a huge difference to how your money should be invested.
So, the real answer to what should you do if you are thinking about consolidating your pension pots, is simply to talk to an expert at Continuum before you decide.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of your pension and investments, and the income they produce, can fall as well as rise and you may get back less than you invested.
Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances.
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